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Chapter 4
Systems Design:
Process Costing
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Types of Costing Systems Usedto Determine Product Costs
Job-orderJob-orderCostingCosting
ProcessProcessCostingCosting
Many units of a single, homogeneous product flow evenly through a continuous production process.
One unit of product is indistinguishable from any other unit of product.
Each unit of product is assigned the same average cost.
Many units of a single, homogeneous product flow evenly through a continuous production process.
One unit of product is indistinguishable from any other unit of product.
Each unit of product is assigned the same average cost.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Types of Costing Systems Usedto Determine Product Costs
Job-orderJob-orderCostingCosting
ProcessProcessCostingCosting
Typical process cost applications: Petrochemical refinery Paint manufacturer Paper mill
Typical process cost applications: Petrochemical refinery Paint manufacturer Paper mill
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Job order costing Many jobs are worked
during the period.
Costs are accumulated by individual jobs.
Job cost sheet is the key document.
Unit cost computed by job.
Job order costing Many jobs are worked
during the period.
Costs are accumulated by individual jobs.
Job cost sheet is the key document.
Unit cost computed by job.
Process costing A single product is
produced for a long period of time.
Costs are accumulated by departments.
Department production report is the key document.
Unit costs are computed by department.
Process costing A single product is
produced for a long period of time.
Costs are accumulated by departments.
Department production report is the key document.
Unit costs are computed by department.
Differences Between Job-Orderand Process Costing
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Processing Processing Department 1Department 1Processing Processing
Department 1Department 1
Processing Processing Department 2Department 2Processing Processing
Department 2Department 2
Processing Processing Department 3Department 3Processing Processing
Department 3Department 3
Finished Goods
StartBasic raw Basic raw materialsmaterials
Processing Processing costscosts
Partially completed goods
Partially completed goods
Processing Processing costscosts
Completed goods
Processing Processing costscosts
Sequential Processing Departments
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Processing Processing Department 1Department 1Processing Processing
Department 1Department 1
Processing Processing Department 2Department 2Processing Processing
Department 2Department 2
Processing Processing Department 3Department 3Processing Processing
Department 3Department 3
Finished Goods
StartBasic raw Basic raw materialsmaterials
Processing Processing costscosts
Partially completed goods
Partially completed goods
Processing Processing costscosts
Completed goods
Processing Processing costscosts
Processing Processing Department ADepartment A
Processing Processing Department ADepartment A
Parallel Processing Departments
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Flow of Materials, Laborand Overhead Costs
FinishedFinishedGoodsGoods
FinishedFinishedGoodsGoods
Cost of Cost of GoodsGoodsSoldSold
Cost of Cost of GoodsGoodsSoldSold
Direct LaborDirect LaborDirect LaborDirect Labor ProcessingProcessingDepartmentDepartmentProcessingProcessingDepartmentDepartment
Direct MaterialDirect MaterialDirect MaterialDirect Material
ManufacturingOManufacturingOverhead verhead
ManufacturingOManufacturingOverhead verhead
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Raw MaterialsPurchases Direct
Material
Flow of Materials, Laborand Overhead Costs
IndirectMaterial
Work in Process Finishing Department
Work in Process Mixing Department
Direct Material
Direct Material
OtherOverhead
Manufacturing Overhead
IndirectMaterial
Actual Applied
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Wages Payable
Direct Material
Flow of Materials, Laborand Overhead Costs
Direct Labor
IndirectLabor
OtherOverhead
Manufacturing Overhead
IndirectMaterial
Actual Applied
IndirectLabor
Work in Process Finishing Department
Work in Process Mixing Department
Direct Material
Direct Labor
Direct Labor
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Wages Payable
Direct Material
Flow of Materials, Laborand Overhead Costs
Direct Labor
Direct Labor
IndirectLabor
OverheadApplied to
Work inProcess
OtherOverhead
Manufacturing Overhead
Indirect Material
Actual Applied
IndirectLabor
Work in Process Finishing Department
Work in Process Mixing Department
Direct Material
Direct Labor
AppliedOverhead
AppliedOverhead
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Flow of Materials, Laborand Overhead Costs
Now, let’s transfer the partially Now, let’s transfer the partially completed goods fromcompleted goods fromthe Mixing Departmentthe Mixing Department
totothe Finishing Department.the Finishing Department.
Now, let’s transfer the partially Now, let’s transfer the partially completed goods fromcompleted goods fromthe Mixing Departmentthe Mixing Department
totothe Finishing Department.the Finishing Department.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Flow of Materials, Laborand Overhead Costs
Direct Material
Direct LaborApplied
Overhead
Direct Material
Direct LaborApplied
Overhead
Transferred to Finishing
Transferred from Mixing
Work in Process Finishing Department
Work in Process Mixing Department
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Flow of Materials, Laborand Overhead Costs
The goods have been completed in the The goods have been completed in the Finishing Department and will be Finishing Department and will be
transferred to Finished Goods Inventory transferred to Finished Goods Inventory when they are ready to be sold.when they are ready to be sold.
The goods have been completed in the The goods have been completed in the Finishing Department and will be Finishing Department and will be
transferred to Finished Goods Inventory transferred to Finished Goods Inventory when they are ready to be sold.when they are ready to be sold.
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Finished Goods
Cost of Goods Sold
Flow of Materials, Laborand Overhead Costs
Direct Material
Direct LaborApplied
OverheadTransferred
from Dept. A
Cost of GoodsSold
Cost of GoodsSold
Cost of Goods
Manufactured
Cost of Goods
Manufactured
Work in Process Finishing Department
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Materials, Labor, and OverheadCost Entries
GENERAL JOURNAL Page 4
Date Description Debit Credit
Raw Materials XXXXX
Accounts Payable XXXXX
To record the purchase of material.
Work in Process - Mixing Department XXXXX
Work in Process - Finishing Department XXXXX
Raw Materials XXXXX
To record the use of direct material.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Flow of Materials, Labor andOverhead Costs
GENERAL JOURNAL Page 4
Date Description Debit Credit
Work in Process - Mixing Deparment XXXXX
Work in Process - Finishing Department XXXXX
Salaries and Wages Payable XXXXX
To record direct labor costs.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Flow of Materials, Labor andOverhead Costs
GENERAL JOURNAL Page 4
Date Description Debit Credit
Work in Process - Mixing Department XXXXX
Work in Process - Finishing Department XXXXX
Manufacturing Overhead XXXXX
To apply overhead to departments.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Flow of Materials, Labor andOverhead Costs
GENERAL JOURNAL Page 4
Date Description Debit Credit
Work in Process - Finishing Department XXXXX
Work in Process - Mixing Department XXXXX
To record the transfer of goods from
Mixing to Finishing.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Flow of Materials, Labor andOverhead Costs
GENERAL JOURNAL Page 4
Date Description Debit Credit
Finished Goods XXXXX
Work in Process - Finishing Department XXXXX
To record the completion of goods and their
transfer from the Finishing Department
to finished goods inventory.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Flow of Materials, Labor andOverhead Costs
GENERAL JOURNAL Page 4
Date Description Debit Credit
Accounts Receivable XXXXX
Sales XXXXX
To record sales on account.
Cost of Goods Sold XXXXX
Finished Goods XXXXX
To record cost of goods sold.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Equivalent Units of Production
Equivalent units are partially complete and are part of Equivalent units are partially complete and are part of work in process inventory. It is the concept of work in process inventory. It is the concept of expressing partially completed products as a expressing partially completed products as a
smaller number of fully completed units.smaller number of fully completed units.
Equivalent units are partially complete and are part of Equivalent units are partially complete and are part of work in process inventory. It is the concept of work in process inventory. It is the concept of expressing partially completed products as a expressing partially completed products as a
smaller number of fully completed units.smaller number of fully completed units.
+ =
Two one-half completed products are equivalent to Two one-half completed products are equivalent to one completed product. So, 10,000 units 70% one completed product. So, 10,000 units 70%
complete are complete are equivalent toequivalent to 7,000 completed units. 7,000 completed units.
Two one-half completed products are equivalent to Two one-half completed products are equivalent to one completed product. So, 10,000 units 70% one completed product. So, 10,000 units 70%
complete are complete are equivalent toequivalent to 7,000 completed units. 7,000 completed units.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
For the current period, Matrix started 15,000 units and completed 10,000 units, leaving
5,000 units in process 30 percent complete. How many equivalent units of production did
Matrix have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
For the current period, Matrix started 15,000 units and completed 10,000 units, leaving
5,000 units in process 30 percent complete. How many equivalent units of production did
Matrix have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
Quick Check
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
For the current period, Matrix started 15,000 units and completed 10,000 units, leaving
5,000 units in process 30 percent complete. How many equivalent units of production did
Matrix have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
For the current period, Matrix started 15,000 units and completed 10,000 units, leaving
5,000 units in process 30 percent complete. How many equivalent units of production did
Matrix have for the period?
a. 10,000
b. 11,500
c. 13,500
d. 15,000
10,000 units + (5,000 units × .30) = 11,500 equivalent units 10,000 units + (5,000 units × .30) = 11,500 equivalent units
Quick Check
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To calculate the cost perTo calculate the cost perequivalent unit for the period:equivalent unit for the period:To calculate the cost perTo calculate the cost per
equivalent unit for the period:equivalent unit for the period:
Cost perequivalent
unit
=Costs for the period
Equivalent units of productionfor the period
Equivalent Units of Production
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Now assume that Matrix incurred $27,600 in production costs for the 11,500 equivalent
units of production. What was Matrix’s cost per equivalent unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
Now assume that Matrix incurred $27,600 in production costs for the 11,500 equivalent
units of production. What was Matrix’s cost per equivalent unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
Quick Check
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Now assume that Matrix incurred $27,600 in production costs for the 11,500 equivalent
units of production. What was Matrix’s cost per equivalent unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
Now assume that Matrix incurred $27,600 in production costs for the 11,500 equivalent
units of production. What was Matrix’s cost per equivalent unit for the period?
a. $1.84
b. $2.40
c. $2.76
d. $2.90
$27,600 ÷ 11,500 equivalent units
= $2.40 per equivalent unit
$27,600 ÷ 11,500 equivalent units
= $2.40 per equivalent unit
Quick Check
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Weighted Average Method
Units transferred to the next department or to finished goods 10,000 Equivalent units in ending work in process inventory (5,000 x .3) + 1,500
Equivalent units of production = 11,500
Units transferred to the next department or to finished goods 10,000 Equivalent units in ending work in process inventory (5,000 x .3) + 1,500
Equivalent units of production = 11,500
Using the weighted-average method, equivalentunits will always be calculated as follows:
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Weighted Average Method
Matrix, Inc. reported the following activity in Mixing Department for the month of June:
Percent Completed
Units Materials Conversion
Work in process, June 1 300 40% 20%
Units started into production in June 6,000
Units completed and transferred out 5,400 100% 100% of the Mixing Department during June
Work in process, June 30 900 60% 30%
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Equivalent units are calculated as follows:
Weighted Average Method
Materials Conversion
Units completed and transferred out of Mixing in June 5,400 5,400
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Equivalent units are calculated as follows:
Weighted Average Method
Materials Conversion
Units completed and transferred out of Mixing in June 5,400 5,400
Work in process June 30
(900 units x 60% complete) 540
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Equivalent units are calculated as follows:
Weighted Average Method
Materials Conversion
Units completed and transferred out of Mixing in June 5,400 5,400
Work in process June 30
(900 units x 60% complete) 540
(900 units x 30% complete) 270
Equivalent units of production in the Mixing Deparment 5,940 5,670
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Equivalent units are calculated as follows:
Weighted Average Method
Materials Conversion
Units completed and transferred out of Mixing in June 5,400 5,400
Work in process June 30
(900 units x 60% complete) 540
(900 units x 30% complete) 270
Equivalent units of production in the Mixing Deparment 5,940 5,670
Equivalent units of production always equals:Equivalent units of production always equals: Units completed and transferredUnits completed and transferred + Equivalent units remaining in work in process+ Equivalent units remaining in work in process
Equivalent units of production always equals:Equivalent units of production always equals: Units completed and transferredUnits completed and transferred + Equivalent units remaining in work in process+ Equivalent units remaining in work in process
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BeginningBeginningWork in ProcessWork in Process
300 Units300 Units40% Complete40% Complete
EndingEndingWork in ProcessWork in Process
900 Units900 Units60% Complete60% Complete
6,000 Units Started
5,400 Units Completed
5,100 Units Started5,100 Units Startedand Completedand Completed
Weighted Average Method
MaterialsMaterialsMaterialsMaterials
5,400 Units Completed 540 Equivalent Units
900 × 60%
5,940 Equivalent units of production
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6,000 Units Started
5,400 Units Completed 270 Equivalent Units 900 × 30%
5,670 Equivalent units of production
Weighted Average Method
ConversionConversionConversionConversion
BeginningBeginningWork in ProcessWork in Process
300 Units300 Units40% Complete40% Complete
EndingEndingWork in ProcessWork in Process
900 Units900 Units30% Complete30% Complete
5,100 Units Started5,100 Units Startedand Completedand Completed
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Production Report
Production Report
Section 1
Section 2
Section 3
A computation of cost per A computation of cost per equivalent unit. equivalent unit.
A computation of cost per A computation of cost per equivalent unit. equivalent unit.
Quantity schedule with Quantity schedule with computation of equivalent units.computation of equivalent units.
Quantity schedule with Quantity schedule with computation of equivalent units.computation of equivalent units.
A reconciliation of cost flows A reconciliation of cost flows for the period.for the period. A reconciliation of cost flows A reconciliation of cost flows for the period.for the period.
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Double Diamond Skis uses process costing to determine unit costs in its Shaping and Milling Department.
Double Diamond uses the weighted average cost procedure.
Using the following information for the month of May, let’s prepare a production report for Shaping and Milling.
Double Diamond Skis uses process costing to determine unit costs in its Shaping and Milling Department.
Double Diamond uses the weighted average cost procedure.
Using the following information for the month of May, let’s prepare a production report for Shaping and Milling.
Production Report Example
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Work in process, May 1: 200 units Materials: 55% complete. $ 9,600Conversion: 30% complete. 5,575
Units started into production in May: 5,000Units completed and transferred out in May: 4,800
Costs added to production in MayMaterials cost $ 368,600Conversion cost 350,900
Work in process, May 31: 400 unitsMaterials 40% complete.Conversion 25% complete.
Work in process, May 1: 200 units Materials: 55% complete. $ 9,600Conversion: 30% complete. 5,575
Units started into production in May: 5,000Units completed and transferred out in May: 4,800
Costs added to production in MayMaterials cost $ 368,600Conversion cost 350,900
Work in process, May 31: 400 unitsMaterials 40% complete.Conversion 25% complete.
Cost
Production Report Example
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Units to be accounted for: Work in process, May 1 200 Started into production 5,000 Total units 5,200
Equivalent unitsMaterials Conversion
Units accounted for as follows: Completed and transferred 4,800 4,800 4,800
Production Report Example
Section: Quantity Schedule with Equivalent Units
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Units to be accounted for: Work in process, May 1 200 Started into production 5,000 Total units 5,200
Equivalent unitsMaterials Conversion
Units accounted for as follows: Completed and transferred 4,800 4,800 4,800 Work in process, May 31 400 Materials 40% complete 160 Conversion 25% complete 100
5,200 4,960 4,900
Section: Quantity Schedule with Equivalent Units
Production Report Example
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Production Report Example
Section: Compute cost per equivalent unitTotalCost Materials Conversion
Cost to be accounted for: Work in process, May 1 15,175$ 9,600$ 5,575$ Costs added in the Shipping and Milling Department 719,500 368,600 350,900
Total cost 734,675$ 378,200$ 356,475$
Equivalent units 4,960 4,900
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
TotalCost Materials Conversion
Cost to be accounted for: Work in process, May 1 15,175$ 9,600$ 5,575$ Costs added in the Shipping and Milling Department 719,500 368,600 350,900
Total cost 734,675$ 378,200$ 356,475$
Equivalent units 4,960 4,900
Cost per equivalent unit 76.250$
$378,200 ÷ 4,960 units = $76.25
Production Report Example
Section: Compute cost per equivalent unit
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
TotalCost Materials Conversion
Cost to be accounted for: Work in process, May 1 15,175$ 9,600$ 5,575$ Costs added in the Shipping and Milling Department 719,500 368,600 350,900
Total cost 734,675$ 378,200$ 356,475$
Equivalent units 4,960 4,900
Cost per equivalent unit 76.250$ 72.750$ Total cost per equivalent unit = $76.25 + $72.75 = $149.00
$356,475 ÷ 4,900 units = $72.75$356,475 ÷ 4,900 units = $72.75$356,475 ÷ 4,900 units = $72.75$356,475 ÷ 4,900 units = $72.75
Section: Compute cost per equivalent unit
Production Report Example
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Production Report Example
Section : Cost Reconciliation
Total Equivalent UnitsCost Materials Conversion
Cost accounted for as follows: Transferred out during May 4,800 4,800 Work in process, May 31: Materials 160 Conversion 100
Total work in process, May 31
Total cost accounted for
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Total Equivalent UnitsCost Materials Conversion
Cost accounted for as follows: Transferred out during May 715,200$ 4,800 4,800 Work in process, May 31: Materials 160 Conversion 100
Total work in process, May 31
Total cost accounted for
4,800 units @ $149.004,800 units @ $149.00
Production Report Example
Section : Cost Reconciliation
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
Total Equivalent UnitsCost Materials Conversion
Cost accounted for as follows: Transferred out during May 715,200$ 4,800 4,800 Work in process, May 31: Materials 12,200 160 Conversion 7,275 100
Total work in process, May 31 19,475
Total cost accounted for 734,675$
160 units @ $76.25160 units @ $76.25160 units @ $76.25160 units @ $76.25100 units @ $72.75100 units @ $72.75100 units @ $72.75100 units @ $72.75
All costs All costs accounted foraccounted for
Section : Cost Reconciliation
Production Report Example
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill /Irwin
End of Chapter 4
